Research Areas - Environmental Policy

FLEXIBLE GREENHOUSE GAS EMISSION BANKING SYSTEMS

Following the signing of the Framework Convention on Climate Change at the 1992 United Nations Conference for Environment and Development in Rio, which calls for the stabilization of greenhouse gas concentrations in the atmosphere at 1990 levels, a growing number of researchers and policy makers have proposed permit trading in greenhouse gasses. While appropriately recognizing the stock nature of the problem, none of this research has investigated the properties of intertemporal GHG permit trading in a general framework that allows the flexibility afforded when permits may be traded, banked and, possibly, borrowed.

This research will numerically investigate the design of time-flexible greenhouse gas permit trading systems. It will explore efficient banking/borrowing systems which provide individual countries and firms with greater time-flexibility in meeting their negotiated obligations, while offering incentives for a sequence of abatement efforts which is in the collective interest of all countries. It will estimate the "interest" rate that should be offered on greenhouse gases permit bank accounts, using marginal abatement cost and marginal damage function estimates available in the published literature. This will allow the determination of the first-best growth in the path of GHG emissions and will indicate the economic gain available to the United States and other regions that may be available from delaying abatement activities by "borrowing" emissions from its future allocation. Alternatively, the numerical results may show that it is beneficial to begin the process by making substantial cuts in emissions and "banking" the savings for the future, when emission reductions may become more costly due to economic growth or a new international treaty which calls for deeper cuts in emissions. Of course, given the great uncertainties that exist for present, let alone future, abatement costs and damages, these estimates will only be indicative of the actual net benefits. Sensitivity analysis will be used to bracket uncertainty.

Funding Agency:   U.S. Dept. of Energy, Integrated Assessment of Global Climate Change Research Program

Principal Investigator:  Jonathan Rubin

Collaborator:   Paul Leiby, Oak Ridge National Laboratory